Oil futures gain on tighter U.S. supplies

Crude contract reclaims $73; natural-gas prices sink

SAN FRANCISCO (MarketWatch) -- Crude futures topped $73 a barrel Wednesday, sending the benchmark contract to its highest close in more than three weeks as investors reacted to U.S. data showing supplies of motor gasoline supplies fell for a fourth week in a row and crude inventories dropped more than the market expected.

Crude for October delivery closed 2.5%, or $1.78, higher at $73.51 a barrel on the New York Mercantile Exchange after peaking at $73.55. On an intraday level, the contract hasn't traded this high since August 15 but on a closing basis, it hasn't reached this level since August 3.

Crude inventories fell by a bigger-than-expected 3.5 million barrels, down to 333.6 million barrels, for the week ended Aug. 24, the Energy Department reported in its latest update on U.S. petroleum stockpiles.

Supplies had risen 1.9 million barrels the prior week, but that came after a total decline of nearly 19 million barrels over a six-week span, according to government data.

Separately, the American Petroleum Institute reported a drop of 4.9 million barrels in crude last week, pegging the total at 331.5 million barrels.

Motor gasoline supplies declined by 3.6 million barrels to 192.6 million, the Energy Department said. They're 8.2% below the year-ago level and have now declined by 12.1 million barrels over the course of four weeks, the data showed.

As measured by the API, supplies of motor gasoline fell by 2.4 million barrels, sinking to 195.2 million barrels in the latest week.

Crude and gasoline supplies both normally decline in August, but "at about half the rate that we saw this week," said James Williams, an economist at WTRG Economics, in emailed comments.

Distillates, which include heating oil and diesel fuel, gained 900,000 barrels to stand at 129.9 million last week, according to the Energy Department. They added 1.7 million barrels to 128.6 million, according to the API.

Against this backdrop, September reformulated gasoline closed at $2.1008 a gallon, up 8.54 cents, or 4.2%. September heating oil tacked on 4.56 cents to end at $2.0419 a gallon.

Refinery activity, gasoline demand falls

The big surprises in the supply data were a "slightly larger-than-expected" decline in gasoline inventories and a "much larger-than-expected draw" in crude supplies, said Jason Schenker, an economist at Wachovia Corp., in emailed commentary.

Inventories were not as plentiful as expected because refinery utilization fell while crude imports contracted by nearly 1 million barrels per day, he said.

Refinery utilization fell to 90.3% of capacity last week from 91.6% a week earlier, the Energy Department reported.

At the same time, what proved to be a "sixth-consecutive build in distillate inventories continues to show a trend of rising inventory levels, which could eventually pull down the price of crude on-trend after the driving season ends," Schenker warned.

He also points out that gasoline demand fell from record levels. Over the last four weeks, motor gasoline demand averaged more than 9.6 million barrels per day, or 0.5% above the same time a year ago, according to the Energy Department.

"As refinery utilization rebounds and gasoline demand falls, product inventories (especially distillates) are poised to build on-trend as we move into the shoulder period," said Schenker.

The latest reading on petroleum inventories "does not fundamentally change our expectations that product prices will pull down the price of crude on-trend as we move into the second half of the year," he said.

Rounding out Wednesday's Nymex action, natural gas for September was down 16.3 cents, or 2.9%, to close at $5.43 per million British thermal units. The contract expired at the end of the session, likely helping to exaggerate the day's move.

October natural gas, which became the front-month contract, closed 18 cents, or 3.1%, lower at $5.581 per million British thermal units.

The Energy Department will provide an update on natural-gas supplies in storage on Thursday morning.

Analysts at Strategic Energy & Economic Research are looking for a climb of 44 billion cubic feet for the week ended August 24. Global Insight expects an increase of 45 billion.

In trading in energy equities Wednesday, oil and gas stocks climbed, with the Oil Service Index
OSX, -1.00%
gaining the most ground. See Energy Stocks.

In other commodities trading, gold futures closed higher as market participants eyed mixed moves in the dollar as well as strength in the broader stock market. See Metals Stocks.

Taking a broad measure of the commodities markets, the Dow Jones AIG Commodity Index
26099104
was up 0.6% at 164.45 points.

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